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SJan 9, 2013

The Fiscal Cliff Is No Problem for the Couch Potato Investor

Scott Burns

Q. I have followed your idea of Couch Potato investing through the years. My question is: Does all the fiscal uncertainty in Washington mean your "recipes" for Couch Potato investing should be changed?

I'm 54 years old and looking at retirement when I reach 65 - I'm at that age where I'm looking at my investing a little bit differently. —S.F., Houston, TX

A/ The Couch Potato portfolios are designed with an eye to future inflation, beginning with the simplest, which holds Treasury Inflation Protected Bonds as one of its two investments. Whether we go over the fiscal cliff or not, we don’t know what the future holds.

The basic idea of Couch Potato investing is to diversify and get out of the future guessing business because we can't predict the future. What we can do is focus on our own lives and the smart decisions we can make to adapt to changes in the world around us. That may be working longer, changing our shelter arrangements, or other adaptations that are likely to be far more powerful than our investment decisions.

Q. I continue to read where more money is going into ETF’s while less and less is going into traditional mutual funds. I have a large percentage of my portfolio invested in mutual funds. Should I be worried that ETF’s will continue to grow while mutual funds decline? Should I consider moving some of my money from standard mutual funds into ETF’s? —W.C., by email

A. Exchange Traded Funds should not be a cause for concern. As with mutual funds, there are many exchange traded funds that have no reason to exist because they are too speculative, too expensive or both. If you are thinking about changing your investments to lower expenses, then you should start considering moving some of your mutual fund investments into the largest, most liquid and lowest cost exchange traded funds. You can find a list of the largest ETFs by assets at this link: http://etfdb.com/compare/market-cap/

Q. I would like to know how best to invest in silver: Would it be by depository, ETFs or silver mining stocks? —C.R., by email

A. The answer depends on your reason for investing. If you believe that silver, as a commodity, will rise in value relative to other tradable investments, then you should invest in a silver ETF, a company that produces silver, or some combination of both. This will be a low cost and liquid form of investing.

If you believe that owning silver will be good because paper money will be a future source of toilet paper, then you should invest in physical silver, preferably in small amounts that can be used as a substitute for paper money. In other words, think silver coins.

Q. I know what you think about Variable Annuities in general. ?But what about the case where the retiree and spouse have a pension, social security, and a sizable required minimum distribution (RMD) at age 72, ?with significant holdings of municipal bonds, and a marginal tax rate of 25 percent? ?He and his wife are near the threshold for a modified adjusted gross income (MAGI) of $170,000. ?Furthermore, the retirees have no need for the RMD money, either now, or in the foreseeable future. ?So do the retirees put the RMD money into the Variable Annuity for tax deferral, or put it into a taxable account? ?If taxable, would something like the Vanguard Mid Cap index be a good taxable investment to be in? —T.D., by email

A. If the primary issue is controlling your taxable income—if only to avoid the uptick in your Medicare premiums that occurs at a MAGI of $170,000—then you might consider a variable annuity that has very low costs. The cost of the Vanguard VA is about 60 basis points, all-in. This gets you tax deferral and the related control of distributions. Fidelity also offers a VA but its costs are somewhat higher. Both are materially lower cost than the vast majority of offerings.

The alternative is an index fund, as you suggest, but it will produce some income and uncertain capital gains realizations. More important, the quest to reduce taxable income will force you to invest more aggressively than you might want. With the VA you can choose a balanced portfolio and have less risk. The total cost of mortality and administrative expenses in the Vanguard product is 0.29 percent, with an additional 0.30 percent for the cost of the balanced fund. So the total cost is 0.59 percent.

Filed Under: Couch Potato Investing